As I understand it, for a deposit of £5000 if there is a "VAT retention" of £1000 this held by the landlord as contingency if the tenant defaults and the landlord has to make use of the deposit. In our case, the other party then charged a further £1000 on top of this for VAT. Is this correct? I would assume that no VAT is charged on the "VAT retention"itself?
Just to be clear, which amount should be included in their quarters VAT Return? (I would assume £1000 and the "VAT Retention" would appear in the VAT Return only if the deposit were called upon by the landlord).
To dispel any doubt there was no question of default on the rent paid.
On termination of the lease the landlord refunded only £5000 on the grounds that as the VAT amounts are a receipt they would only be paid over to HMRC by ourselves as VAT anyway. If we assume this argument holds (and it itself seems illegal) then at the minimum they should have refunded is £5000 + £1000 being the "VAT retention".
The other party are a professional commercial property management company. Accordingly, I should be very interested in your comments and views.
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Am I correct in thinking you paid £7,000 in total? (£5,000 + £1,000 "VAT retention" + £1,000 VAT).
Doesn't sound right to me. You should only have paid £6,000 in the first place. Did you receive a VAT invoice when you paid the deposit, and - if so - did you reclaim any VAT?
Wouldn't have thought that a deposit was a VATable supply.
Have they offered a VAT receipt?
I would expect a deposit is not ‘consideration for a supply’ even if it is said to include VAT. But the terms of the lease will determine the correct position.
But the ‘VAT’ amount should be refundable.
I read it as they want £6000 deposit but they won't be paying over any output tax unless the lessee defaults.
Hence, no supply and no input tax.
Could be wrong. Just trying to decipher the facts.
That is exactly as I got it
£6000 deposit, that on failure becomes £5,000 rent plus VAT
Nothing goes on VAT return.
Based on the facts provided.
If the total paid was £6,000 then £1,000 amount of the initial deposit is not VAT, it is an amount equivalent to VAT. It isn't input VAT and doesn't go onto the return.
The sentence starting 'On termination ....' is complete rubbish. The whole £6,000 should be returned.
If the other party are making that argument then they are NOT a "professional commercial property management company".
Well, maybe. But in practice, the deposit becomes the last month's rent, does it not?
Does anyone exchange payments of £6000? I wouldn't have thought so.
Actually, in practice, £5,000 + VAT often becomes the amount that the landlord tries to extract out of the former tenant as dilapidations.
Not always wise to withhold last month's / quarter's rent on the basis that it's covered by the deposit. If this is done then often other conditions in the lease will kick in.
Personal experience is to avoid rent deposits if at all possible. Failing that get it written into the lease that's it's returned say year 3 of a 5 year lease following prompt payment of rent throughout those 3 years. Even then landlords, or their representatives, will do their best to hold on to it.
Some will some will not, we certainly do not, if deposits need returned we return them.
Maybe it depends upon size but if you are gathering in rents of over £1m a year, mainly in one city, your reputation tends to be important, often we have business entities who over the years have rented various properties from us, what is the point of getting a bad reputation, one just loses repeat trade?
Yes, all the time.
We carry about £60k of deposits, tenants normally pay the full amount of rent then we refund- deposits often cover far more than rent they usually cover all lease obligations including say dilaps etc and reimburse us if a lease says tenant should redecorate in final year but they have not etc.
What I am failing to understand, quite apart from the question of whether or not there was a taxpoint, is why you were charged (and why you agreed to pay) a second £1,000.
Out of interest, how much did you pay the previous tenant for the assignment - presumably it reflected the deposit?
This is where we discussed it before:-
https://www.accountingweb.co.uk/any-answers/vat-on-office-rent-deposit
Note that Les, our resident VAT expert, edited his (unusually incorrect) post after I posted mine. Normally I wouldn't contradict Les on VAT matters but had to on this one!